Wednesday, 27 February 2013

Change tack

"When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean -- neither more nor less."
"The question is," said Alice, "whether you can make words mean so many different things."

If you replace “word” with “policy.” It’s exactly the response of George Osborne to the decision by the credit agency Moody’s to scrap Britain’s AAA rating. Just to remind you, dear reader. The mantra used by Osborne to keep our rating was “austerity” and more “austerity.” If he didn’t cut, the UK would loose its AAA rating.

So he cuts and cuts and continues to cut, and lo and behold what happened? Over the weekend, the UK looses its AAA rating.

But you’ve got to admire Osborne without even a by your leave, his mantra changes. Now it’s yet another reason to stick to austerity. So there you have it cuts stop you loosing your status and now they’re needed despite the down grading.

Now I’m not one to take credit agencies seriously, after all they failed to predict the financial crisis, but Osborne and Cameron used them to justify their economic policies. They made them the central test of market confidence, so the weekend’s announcement is another sign of Osborne’s failure.

Failure upon failure. The deficit was going to be sorted this side of the election, but now the target has been moved until 2018. Borrowing is now going to be higher and that’s why Moody downgraded the UK. The expect a “high and rising debt burden.”

Osborne in his first budget predicted that cuts in the public sector would produce a growth led by the private sector. But we’ve witnessed an economy that has flatlined. Or as Moody puts it “sluggish growth” is going to be the UKs lot until “the second half of the decade.”

As this blog has frequently said we’re facing a triple-dip recession and Osborne seems incapable of new thinking. It’s like the 1920s again with the political class of Europe thinking that the only way out of the mess is austerity. Now the politicians in the 20s had an excuse they didn’t know any better, but John Maynard Keynes showed there was an alternative.

Cutting in times of depression makes a bad situation a hell of a lot worse. The IMF looked at 173 cases of fiscal austerity in advances countries over the period 1978 to 2009. What they found, austerity policies lead to economic contraction and higher unemployment.

As Paul Krugman said in the first chapter of “End this depression now.”

Disasters do happen-history is replete with floods and famines, earthquakes and tsunamis. What makes this disaster so terrible-what should make you angry-is that none of this need be happening. There has been no plague of locusts; we have not lost our technological know-how; America and Europe should be richer, not poorer, than they were five years ago.

Nor is the nature of the disaster mysterious. In the Great Depression leaders had an excuse: nobody really understood what was happening or how to fix it. Today’s leaders don’t have that excuse. We have both the knowledge and the tools to end the suffering.”

To carry on regardless with the same old policies when they’re failing is sheer political and economic incompetence. If Osborne is too stubborn to change tack, then Cameron has to show him the door. A new approach is needed, urgently.

2 comments:

Fine, change tack. Let's find a new approach. But not one that involves massive public spending on nonsense infrastructure projects that create jobs for the poor and uneducated. In other words, those that don't pay much, if any tax.

As most economists will tell you, the amount of public spending needed to actually make any difference at all is way, way, way above what you seem to think. Indeed, it is so much more than we can afford even in good times let alone bad.

So yes, I'm open to all sensible suggestions. But not those that pander to the poor, uneducated and work shy.

Seem to work for FDR and the New Deal lots of infrastructure programs for the poor and downtrodden, banks were regulated, the rich payed their fair share, this all was the beginning of one of those most prosperous eras in US history, everyone pays taxes whether it is income tax, VAT etc, and people who have money to spend put into the economy, rich folk usually sit on it.